More a warning than an announcement here: I've just come out with a new Kindle/Nook with the above title.

I actively discourage Bogleheads from buying this one; it's aimed primarily at institutional money managers, and its content and rationale will be familiar to all of you, which are a warning against the "alternatives"/Yale Model bandwagon, which I think has grossly overgrazed its commons. You'll be wasting your money since won't learn much from it that you already don't know.

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn.

Very interesting. Could this explain why, I think, that international equities, public REITS, and GOLD have become more correlated with equities? So the catch-22 for the small investor is that assets with low correlation aren't accessible, and those that are now accessible lose some of their diversification benefit as they become accessible. This also calls into question the practice of looking at historic correlation numbers for assets that previously were not as accessible to the general investing public.

wbern wrote:The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

Do you think assets become easier to buy because they have become more popular? It doesn't make sense to create a liquid market in an unpopular asset class.

Yet another case of "everyone wants to be a contrarian" ruining some nice strategies.

wbern wrote:Exactly. The best you can do is wait for the asset class to fall out of favor. Here's a great example from the booklet: the correlation of precious metals stocks with the S&P over time:
....(snip)...

Bill, I'm guessing that you would not use correlation as a way to determine this, or would you? Is it a good assumption that correlations are not a useful timing mechanism? In other words, low correlations may be a sign the asset class is out of favor but do we have any hope that it will, after not too many years, ride the momentum wave again?

More a warning than an announcement here: I've just come out with a new Kindle/Nook with the above title.

I actively discourage Bogleheads from buying this one; it's aimed primarily at institutional money managers, and its content and rationale will be familiar to all of you, which are a warning against the "alternatives"/Yale Model bandwagon, which I think has grossly overgrazed its commons. You'll be wasting your money since won't learn much from it that you already don't know.

The one concept which Bogleheads might find interesting is that as an asset class becomes easier to buy and thus more widely held by weak-handed investors, its correlation with other asset classes will rise preciptously, since it also becomes easier to sell during a general downturn. But, there, I've already told you, so you don't have to pay for it!

Best,

Bill

Bill,
Many thanks for the heads up. Sorry but you're going to have work much harder than that to dissuade me from reading anything you've written!
Look forward to reading it.
cheers,

"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Well, causation probably does run both ways between ease of purchase and popularity, hard to disentagle that, and both of those lead to increased correlation.

No, I sure don't look at correlation as a measure, though John Rekenthaler, jokingly I think, suggested that one could measure the "bozality" of an asset class (the extent to which it was owned by bozos), an otherwise fairly unobservable quantity, by following correlations and working backward.

My measures are more qualitative, but Rick Ferri, who I quote in the piece, noted a good one--the % of alternatives in large endowment portfolios. It's like pornography: hard to define, but you know it when you see it.

Love it. A boglehead style author, like Dr. Bernstein, coming on here to convince us not to waste our money on a book.

I would have to disagree there are some assets that will never high correlation. Gold (the hard stuff) and equities will NEVER have a high correlation. Cash is another. If equities are doing well no one will want to own gold or cash and their zero real return. If markets tank that is when folks take their money out and start bidding up the prices on assets considered "safe". If anything more liquid trading environments will only enhance that as it makes it easier for folks to do that. I wouldn't be surprised if the liquidity of markets is the reason volatilities seem higher now then in the past.

Good luck.

"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

Bill

i love it a bet with Dr. Bernstein.

On a more serious note I 100% agree that riskly assets will go to 1.0 in times of crises. Now the question is if risky assets go to 1.0, i.e. tanking, where does all the money go?? My guess is cash, LTGB, gold or some combination.

Off the topic, but since I have your ear can you tell me why in times of crises money bids up the longest end of the yield curve, i.e. Long term treausuries?? I would think with how liquid treausury bonds are that folks would flock to shor term treasuries (just to eliminate default risk) until the stress subsides?? It isn't like most folks hold treasuries until maturities. Is this behavioral to go for the furthest out in times of market stress or is there another reason??

Thanks.

"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle

Does anyone have correlation curve like above for Small Cap Value? Does the Small Value premium still exist or has it gone away for the same reason discussed above? Everyone is tilting and buying this class has never been easier. So is there any benefit any longer to tiltiing?

No worries. I enjoy your writing so much it will be an early Christmas present to myself - even if I already know most of it!

Two comments/observations/questions:

1. If asset correlations are rising for easily investable assets, perhaps the value of slicing and dicing is diminished? (Particularly for those who use a value tilt - value investing is something you continue to advocate for in your recent missive - if correlations are increased, perhaps the benefit of such an approach stems from a risk based story rather than behavioral where the benefit accrues to the patient holder?).

2. If the place to go to get better returns are those where weak handed investors aren't, I suppose for the small investor that argues looking for sidelines outside of the equity markets - side business, private real estate investing, etc. Diversifying income and assets. More risk but potentially more reward.

Well, yet one more Boglehead has demonstrated they don't need the booklet, having reached the conclusion that I make, which is that the best opportunities:

1) Lie well outside the publicly traded markets, and
2) They involve real work, which is presumably what you're trying to avoid in retirement.
3) Carry with them a gargantuan amount of nonsystematic risk.

So both of you are saying that self managed cash flow positive rental real estate is very likely a good investment for the little guy but frought with risk. Many here have advocated this for a long time if the properties are bought at a competitive price and you keep your total investment money low in any single property. This is old news coming back to tell us there is no free lunch. Everyone has to work as my Dad used to say.

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.

We don't know where we are, or where we're going -- but we're making good time.

Browser wrote:Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.

I utilize the PP for part of my investment portfolio and I am not angry with his comments at all. In fact, I suggest you read Dr. Bernstein's piece about the permanent portfolio from a few years ago. I believe he said it was a thing of beauty in many respects as it's correlation grid is one not seen very often in finance. I think his problem with it was the recent money flows into the investment strategy and whether investors could stay the course due to the tracking error vis-a-vis conventional portfolios.

What should be mentioned is staying the course seems to be a problem for most portfolios. In any event, unless I am mistaken, you have previously said that stocks, long treasuries, and gold are all going to fall in value. Can I assume that you are shorting each of these or do you have a different strategy?

Browser wrote:Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.

I utilize the PP for part of my investment portfolio and I am not angry with his comments at all. In fact, I suggest you read Dr. Bernstein's piece about the permanent portfolio from a few years ago. I believe he said it was a thing of beauty in many respects as it's correlation grid is one not seen very often in finance. I think his problem with it was the recent money flows into the investment strategy and whether investors could stay the course due to the tracking error vis-a-vis conventional portfolios.

What should be mentioned is staying the course seems to be a problem for most portfolios. In any event, unless I am mistaken, you have previously said that stocks, long treasuries, and gold are all going to fall in value. Can I assume that you are shorting each of these or do you have a different strategy?

I guess whether they all fall in value will depend in part on all the newly-hatched PP-ers "staying the course". As BB points out, it's a lot easier to sell gold now than it used to be, so if you had wanted out of the PP in previous times getting out of the gold was the tricky part. I guess we'll have to wait to see what happens. BTW, I'm not hoping for that outcome since I have some IAU as insurance and would like to collect in the event everything else goes into the handbasket.

We don't know where we are, or where we're going -- but we're making good time.

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.

What's going to save the bacon of a traditional stock/bond (60 Stock/40 bond) portfolio - if treasuries and stocks are dragged down?

wbern wrote:Actually, that's not as much of a joke as you think; watch the credits of "Miracle," and you'll see that a significant number of the 1980 hockey gold medal winners went to work in retail finance.

Bill

just watched it last night and noticed that as well...

"...people always live for ever when there is any annuity to be paid them"- Jane Austen

Dr Bernstein, I'm a physician who's been in practice for a couple of years. I wanted to thank you for writing "The Four Pillars Of Investing." I only wish I had read it in residency. Maybe it will be part of required med school reading one day. Thank you!

Well, yet one more Boglehead has demonstrated they don't need the booklet, having reached the conclusion that I make, which is that the best opportunities:

1) Lie well outside the publicly traded markets, and
2) They involve real work, which is presumably what you're trying to avoid in retirement.
3) Carry with them a gargantuan amount of nonsystematic risk.

Bill

if true, then the worst opportunities :
1) are within the public traded markets/total markets
2) involve no work and no thinking, i.e. automatic indexing
3) carry with them a gargantuan amount of systemic risk (this is a redundant point because identical to 1) )

Thanks for your comments. Then we both have testable hypotheses; I'm willing to bet that GLD, now that it has made gold an easily tradable commodity, will provide little shelter during the next downturn.

Needless to say, I was referring to risky assets, not riskless ones, whose correlation will go to -1.0 during a crisis.

Bill

Could you please elaborate which assets are riskless, i.e. a guarantee for not losing any money.

Marvelous comments, Dr. B. Now you've gone and made two groups angry with you, I'm afraid: first the Permanent Porfolioers who are counting on gold to save the bacon if interest rates take off and drag down Treasurys and Stocks like the 1970s; and second, those "expert" commentators who are endlessly chiming about all the latent "money on the sidelines" just waiting to materialize into the markets somewhere. Thank You! Now, excuse me so I can log on to Amazon and download your new Kindle book.

What's going to save the bacon of a traditional stock/bond (60 Stock/40 bond) portfolio - if treasuries and stocks are dragged down?

Unfortunately, it may not be possible to save the bacon if stocks and treasurys head down together. During the last quarter of 2008, the correlation of the monthly returns of Gold and TSM spiked up to 0.8 as they both went down together. As we know, it was the "flight to safety" returns from Treasurys that saved the bacon then. As Dr. B points out in his great new e-book (which I have avidly consumed) the trend of the correlation between commodities and equities has moved from negative to positive. The same thing appears to be going on with gold as well. There is still a low positive to low negative correlation between bonds and commodities and between bonds and gold. So, if stocks head down along with Treasurys, will Gold be there to "save the bacon" as in the 1970s? Maybe not. Gold was massively undervalued then, it wasn't even an investible asset except to the few, enjoyed a huge non-liquidity premium, and no-one had even heard of the Permanent Portfolio. None of those factors are at play today. When the bacon hits the fan, I don't think the PP will "crash" compared to more conventional portfolios - I think it will probably perform about the same as many similarly conservative portfolio allocations. It won't offer the same level of downside protection as it did in the 1970s, and it won't perform as well as conventional portfolios otherwise. As Dr. B points out, that's what happens to portfolio strategies once they've become bozo-ized.

We don't know where we are, or where we're going -- but we're making good time.

Unfortunately, it may not be possible to save the bacon if stocks and treasurys head down together. During the last quarter of 2008, the correlation of the monthly returns of Gold and TSM spiked up to 0.8 as they both went down together. As we know, it was the "flight to safety" returns from Treasurys that saved the bacon then. As Dr. B points out in his great new e-book (which I have avidly consumed) the trend of the correlation between commodities and equities has moved from negative to positive. The same thing appears to be going on with gold as well. There is still a low positive to low negative correlation between bonds and commodities and between bonds and gold. So, if stocks head down along with Treasurys, will Gold be there to "save the bacon" as in the 1970s? Maybe not. Gold was massively undervalued then, it wasn't even an investible asset except to the few, enjoyed a huge non-liquidity premium, and no-one had even heard of the Permanent Portfolio. None of those factors are at play today. When the bacon hits the fan, I don't think the PP will "crash" compared to more conventional portfolios - I think it will probably perform about the same as many similarly conservative portfolio allocations. It won't offer the same level of downside protection as it did in the 1970s, and it won't perform as well as conventional portfolios otherwise. As Dr. B points out, that's what happens to portfolio strategies once they've become bozo-ized.

I do appreciate your PP tutorial, predictions on future PP returns, and the bozo reference. Seems to me stocks were bozo-ised in the late 1990s, but I guess there is no reason to re-hash the 2000-2012 secular bear circus. It is better to look forward...

My question was directed at a 60% Stock - 40% Bond portfolio or even a 25% Stock - 75% Bond Portfolio. What saves "the bacon" of stock/bond portolios in a scenario where stocks and treasuries go down together? Is it stay the course and wait for the expected return to show up? Is it International stocks and bonds?

My question was directed at a 60% Stock - 40% Bond portfolio or even a 25% Stock - 75% Bond Portfolio. What saves "the bacon" of stock/bond portolios in a scenario where stocks and treasuries go down together?

Gee, I thought I answered that. One of us needs to re-read the previous posts. I'm out of bacon-savers.

We don't know where we are, or where we're going -- but we're making good time.

Gee, I thought I answered that. One of us needs to re-read the previous posts. I'm out of bacon-savers.

My bad. I did not catch the bacon amongst the bull...

May the Good Lord and other posters please forgive me for hijacking this thread into yet another Permanent Portfolio debate. But I feel obligated to try to defend myself by calling in the Big Gun himself. From the Kindle book where he discusses the PP. I recommend highly that you go ahead and spring for the three bucks to read all he has to say about it:

... you get an expected return [from the PP] of . . . 4.5%/ 0.5% nominal/ real. You’ll gain some return from rebalancing, but lose most of that to investment expenses. There will be tears.

So while I’ll admit that the Harry Browne portfolio still has a lot to recommend it, I’m not sanguine about its current popularity, which rests on the salutary recent performance of its two most unorthodox risky components, gold and long bonds. Both investment history and human psychology suggest that when these two asset classes turn sour, as they will one day, Harry Browne adherents will abandon the approach in droves...

We don't know where we are, or where we're going -- but we're making good time.

For many investors, an ideal asset class would combine superior long-term absolute and risk-adjusted returns with a hedge against inflation and stock market volatility. There’s a way to get all of that, in an asset class you might never have thought of until now: fine wine. Investment-grade wine deserves careful consideration, particularly now that – unlike other collectibles, such as art and rare books – it can be traded on a regulated exchange.

People have been purchasing fine wine for investment for more than 150 years. The practice originated with the British, Dutch and the French. Only recently, however, has it become possible to do an in-depth comparative analysis of the investment-grade wine market versus other asset classes – sufficient market information only became available after the creation of the London International Vintner’s Exchange (“Livex”) in 1999 and the subsequent publication of the Liv-ex Fine Wine Investables and Liv-ex 100 indices in 2001.

.
Not for everybody, but on the basis of annualized returns, volatility, and risk-adjusted returns, for the last 20 years fine wine has beaten the pants off the S&P 500. EAFE, Emerging Markets, Commodities, and Gold. And maybe the puck isn't there yet.

I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

While I appreciate the idea of investors getting to the party too late I disagree with much of what's been posted so far.

I haven't conducted comprehensive research but from what I have seen some institutions have done well using actively managed portfolios which contain alternatives. I realize average investors don't have access to some of the classes used by institutions.

Eliminating alternatives from consideration, especially now, really cuts into one's diversification. By eliminating alternatives one falls back on essentially capital assets, throwing out classes based on supply-and-demand and psychology...these last 2 categories being where a number of inflation fighters live, along with low correlators.

It's easy for me to post the above because I delegate almost everything to my fund managers, but everyone can do that. I think going forward with just stocks and bonds could be risky, given growth and rate prospects. Throw high inflation into the mix and things could get tough for capital assets.

Hope for the best but expect the worst, be prepared. Instead of skating to where the puck was or where you think it might go be an adept skater and use several sticks.

wbern wrote:I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

maddyken wrote:While I appreciate the idea of investors getting to the party too late I disagree with much of what's been posted so far.

I just purchased and quickly read Bill's book, and actually find myself agreeing more with you than Bill.

My feelings are, mostly from both personal experience as well as articles like this one (Investors still rushing out of stocks into bonds: http://buzz.money.cnn.com/2012/11/15/st ... und-flows/ )* leads me to believe that Bill is maybe given the average investor with a healthy 401(k) a little too much credit for being more sophisticated than they really are. I work directly with 25 or so college educated people, not in the investment sector, and I bet not one of them could tell you what REIT even stands for, and probably none of them own Gold bullion, or a commodities fund. However, I know a bunch of them that have a crap-load of bonds and, if not bonds, mostly US Stocks. In short, the average Joe most certainly does not own the Yale Model. If the strong hand is a balanced fund, then my whole office except me, the dope, has the strong hand. And all of them owe me an explanation why I've beat the S&P 500 10 straight years (on pace for 11, so far), and probably with lower volatility (though I have no way of measuring that).

If the book's point is mostly just to let us know to not expect outstanding returns for the long term, then that's fine. But for my (passive), long-term investment portfolio, I don't see how I can do much better. I already have a job, and not much free time. I'm not open to using what little time I have left to go into the real estate business on the side, using the money I have tied up in retirement account and paying huge penalties for breaking IRAs.

Bill, I love you man, but you might have had good advice in your initial post.

* If links like that aren't allowed, just let me know and I won't do it again.

Bill Bernstein wrote:since the major driver of SV returns is simply the market return, the correlations with other asset classes are going to be pretty similar to TSM. The larger question is whether the premium has gone away because it's gotten so much easier to buy. I don't know the answer to that one, but I suspect the correct response is that "some of it has."

If this is true (and I don't know) the question becomes, how much do you pay per unit of SV risk? The logical answer is “not as much as before.”

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

Azanon's comments are well taken; that's what I said in my original post: my major target is institutional managers, not small investors, most of who have never been near private equity or a hedge fund. (On the other hand, if you take a seven-figure portfolio to a wirehouse "wealth manager" you will very likely wind up owning one or more alternative asset classes.)

And those of you who ignored my advice and bought my booklet will recognize that I offer little advice to Bogleheads beyond "stay away from alternatives," which you already knew.

And I'm certainly not suggesting that anyone go out and buy Tuscon rental properties. The whole purpose of saving and investing is so you can *quit* work. I merely used that as an example to show that real alternatives, in their early, high return/low correlation initial phase are always real work. (Which was the purpose of the John Templeton and David Swensen stories.)

Rick's question is a good one. Is is worth, say, 40 extra bp to get heavy factor exposure? For now, I think that the answer is still yes.

wbern wrote:
Is is worth, say, 40 extra bp to get heavy factor exposure? For now, I think that the answer is still yes.

Bill

And as you pointed out in your last kindle book, SV provides a likely premium for the saver even if the actual premium itself disappears, due to the higher volatility and ability to buy at depressed prices.

In 1999 you seemed worried that the Value premium might start to disappear due to the fact that it was catching on, and seemed to reward nonsystemic risk. I was curious of your thoughts looking back at that article from EF. http://www.efficientfrontier.com/ef/999/risk.htm

I tend to believe that the value premium will never disappear since I see it as a behavioral issue (and admittedly challenge to the EMH).

I was recently reading some of Swenson's "Pioneering Portfolio Mgmt"
I was thinking that Swenson was ahead of his time, but that the markets may be catching up to him and his best days are probably in the past.
the Big 3 didn't do so well this year:http://www.nytimes.com/2012/10/13/busin ... d=all&_r=0
I think Harvard, Yale, and Princeton all got beat by the S+P, and harvard was in the red even.

(haven't read the kindle book yet) but I wonder if anybody ever looked at how those endowments were performing once you consider their "fees"- paying all the staff and everything else it took to manage it. (with endowments in the billions maybe not too high?)

wbern wrote:I don't know about fine wine, but I know that paintings have been looked at by Bill Baumol in the AER Review papers in 1986.

He noted that standard economic theory suggested that if an item has consumption value, that should detract from investment value.

Which is exactly what he found with paintings over the past 300 years.

Since the pleasure of fine wine, to say nothing of its perishability, is arguably greater than paintings, then that should detract from its investment return to an even greater extent, the data you quote not withstanding.

Or, to quote George Raft, "Part of the $10 million I spent on gambling, part on booze, and part on women.
The rest I spent foolishly."

The problem with wine as an investment, is it is illiquid. (I had to say that.) It's not easy to sell, and you have to prove the provenance, that it was stored correctly.

And, if you are a serious wine collector for your own account, you will end up sharing the pearls mostly with people who do not really appreciate it.

The overall quality of wine has improved remarkably over the past few decades. Also, any bottle (including whites) will usually improve a lot by laying for six months undisturbed. What matters is not temperature so much (within reason) but temperature fluctuations.

Buy a few bottles each of a few decent wines, lay them on a concrete floor and cover them with leftover pink insulation. Replenish (by the bottle or two) as needed. Prosecco (Aldi's is good), Sauvignon Blanc (unoaked), a lighter Pinot Noir, Cabernet. Done.